Australia may face a 240,000 residential supply shortfall over the next five years as Australia’s population grows, says Stuart McCann, managing director and head of investment banking – Pacific and SEA, CBRE Capital Markets. He was speaking at the Australia Real Estate — Beyond Traditional Returns seminar on Jan 20, organised by The Edge Singapore and supported by BigFundr.
CBRE expects Melbourne to bear the brunt of the shortfall, facing a housing deficit of 77,924 units, closely trailed by Perth with a deficit of 57,216 units and Sydney with a deficit of 55,184 units.
McCann attributes Australia’s looming housing shortage primarily to projected population growth. Fueled mainly by net overseas immigration, the country’s population is set to surge by 15%, skyrocketing from 26.5 million in 2023 to 30.4 million by 2033. This growth outpaces that of several major global economies, including New Zealand (9%), Switzerland (8%), India (8%), and Singapore (7%), yet falls behind Canada’s 16%.
This has created a demand in the residential market, which is seeing capital value growth despite interest rates increasing for the last few years. “This tells us that when demand outstrips supply, it doesn’t matter how much interest rates move; you’re going to get capital value growth,” says McCann.
Boosting employment
Demand may rise further if CBRE's employment and wage growth predictions ring true. The consultancy adds that job creation will boost employment numbers from 14.1 million in 2023 to 16.7 million by 2033. Similarly, the average wage will grow from A$96,000 per year to A$132,000 per year.
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Together with population growth, they make up what McCann calls a “triple boost” effect expected to drive up real estate demand in Australia, not just for the residential market.
“There is no way, in the short term, that we can meet the supply problem,” says David Payton, CEO and executive director of Payton Capital. He estimates it will take at least three to five years to complete the small- to medium-sized developments.
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The lack of affordable units could further compound the situation, adds Payton. “As construction costs have gone up, that has to be passed on to the consumer,” he continues. Poor sales could lead to cash flow problems and delays in the project, preventing gross residential supply from meeting the rising demand.
“We are seeing very high [office] utilisation rates,” says McCann. CBRE notes that CBD visitation rates across Australia have reached 71% of pre-Covid-19 levels as of 3Q2023, with cities like Perth and Adelaide reaching 91% and 85%, respectively. This has led to growth in commercial office space, with Sydney expected to lead rental growth rates across the next two years.
CBRE also sees an opportunity for private credit institutions to buy commercial real estate (CRE) debt, as a significant amount will be due for refinancing in 2024.
According to Payton Capital, the Australian CRE debt market is estimated at $442 billion in 2023. Private CRE debt currently makes up $74 billion (16%) and is expected to more than double in the next five years.
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